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Morning Call about Indus Motor Company Limited – Arif Habib Limited

Karachi, October 01, 2012 (PPI-OT): Declining volumes and other income to drag profitability in FY13

Arif Habib Limited downgrades Arif Habib Limited’s stance to hold on Indus Motor Company Limited (INDU) with a target price of PKR 279/share, offering a modest upside potential of 9.5% from last closing price of PKR 255/share.

According to Arif Habib Limited’s downgrading stance mainly emanates from threatening imports, which have forced the company to cut down its production. In addition to this, other income (contributing 28% to net earnings) is expected to go down in FY13 due to lower advances from customers and declining interest rates.

Sales volume to remain depressed in FY13
Discontinuation of low end Coure and continued pressure from the imported cars is expected to drag the volumetric growth by a 15% YoY in FY13 to 47k units from 55k units in FY12. Rising inventory levels compelled the company to shut its plant down for another 7 days in September 2012 taking total non production days to 17 in 1QFY13. Even management of the company felt the heat from the imports and highlighted their concerns in the last analyst briefing, citing that the imports were hurting their sales and urged the government to intervene. 2MFY13 sales figures pretty much tell the same story, where INDU lost its volumetric sales by 23.5% YoY to 6,110 units.

Lower advances from customers are likely to dent other income
Other income which skyrocketed in FY12 to PKR 1.77 billion (contributing 28% to PAT), is projected to plunge by 39% to PKR 1.1 billion in FY13E on the back of lower advances from customers and declining rates on deposits. Previously company was booking cars on 100% full advance payment, but now the management has revised the booking policy to 25% payment at the time of booking and remaining 75% at the time of car delivery. However due to high inventory, currently any variant of Corolla can be delivered in 7 days upon full payment.

Falling interest rate will further dampen the other income
In addition to lower advances from customers, other income is further likely to be diluted by declining interest rates. INDU has T Bills worth of PKR 2.7 billion (FY11: PKR 2.1 billion) by the end of FY12, which are expected to yield less in FY13 due to a 150 basis points cut in discount rate. Moreover, the company booked a hefty gain of PKR 335 million in FY12 on the redemption of Mutual Fund units, which Arif Habib Limited fear is not recurring as company’s investment in Mutual Funds has dropped to PKR 2 million from PKR 2,903 million in FY11.

Regulatory change may bring some respite
Some respite might come if the government decides to give some relaxation in upcoming Auto Industry Development Policy. Auto Assemblers are demanding to increase import duty and decrease age limit of imported cars to 3 years from 4 years. If approved, this could be a price trigger for the stock.

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